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Deutsche Shuts Its Eyes and Hopes for the Best

(Bloomberg Opinion) -- The final months of a dismal year were predictably bad for Deutsche Bank AG. That Germany’s biggest lender will recover even some of the ground it has lost, a central assumption of its planned turnaround, is far from certain.

Revenue fell for the eighth consecutive quarter during the last three months of 2018, dragged down by a plunge in its key bond-trading business, which trailed many Wall Street peers. The 23 percent decline in revenue from trading fixed-income and currencies compared with an average 17 percent drop among U.S. peers, according to Bloomberg Intelligence.

To be fair, conditions in the fourth quarter were horrid, and news of more regulatory mishaps at Deutsche Bank meant clients appeared less keen to engage with the lender than with competitors.

On Friday, Chief Executive Officer Christian Sewing sought to reassure investors and customers that no new legal matters have arisen in the order of magnitude that the bank has seen in recent years. That the latest money laundering allegations related to Danske Bank A/S don’t appear to be worrying management too much should provide some comfort for investors.

Sewing has also been tougher on costs, delivering on faster and deeper cuts that allowed the lender to post its first full-year profit since 2014. He has pledged to pare expenses further in 2019.

But sustainable profitability is still far from sight. Even the paltry 4 percent return on tangible equity that Deutsche Bank is targeting in 2019 – up from 0.5 percent in 2018 – looks a stretch.

Deutsche Bank aims to reach that objective by cutting a further 1 billion euros ($1.2 billion) from its approximately 23 billion-euro annual cost base, while it expects a more favorable tax rate in 2019. These it describes as “controllable” factors.

But the projections to improve profitability also rely heavily on what it has failed to get a handle on: growing the bank’s market share amid better trading conditions.

It’s difficult to see how that is achievable. As it has shrunk its securities unit by exiting the least profitable businesses, the bank has seen revenue contract by 16 percent in two years, losing more business than it would have liked.

Pushed by a JPMorgan analyst on what makes management confident it can expand revenue by 4.5 percent this year if it is to achieve its target, detail was thin.

CFO James von Moltke said the bank feels good “about the momentum” in the businesses that will drive loan expansion. As for trading, the bank has “strong franchises, well positioned in the market environment that we’re in to perform and frankly recover the market share we lost in 2018,” he said.

There was, though, some good news. With ample liquidity and greater confidence in how it manages those funds, Deutsche Bank feels empowered to reduce some of its buffers and put the cash to better work. It's another core, controllable element that will improve profitability, the bank said.

Sewing and Von Moltke reiterated they are committed to delivering their standalone plan. But sufficient doubts will remain about whether the lender can pick itself up from the floor for the merger chatter to persist.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.